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Let’s talk about baking bread

I’ve mentioned a few times, how large-scale central planning leads inevitably to artificial scarcity and rising prices. Allow me to illustrate – using a completely invented allegory about bread – that has absolutely no parallels to any economy you may already be familiar with.

We start with 20

Let us say, there is a group of 20 people in a village doing something that requires some niche skill and interest, but not inordinate amounts of talent or uncommon knowledge, such as baking loaves of bread containing emmer wheat. This is not an easy thing to do, and you’d have to read up on it and practice, to begin with, but it’s not an insurmountably-high barrier for anyone who already knows how to bake.

Now, they’re not baking all that much of this bread, as the market for people who want to eat it, is still rather small. But, they’re happy to bake the bread, and sell it below cost (at $10), as they can see that the market is steadily growing and they know that there is a possibility of recuperating their investments, and maybe even turning some profit. They hope to eventually profit either directly (through the selling of the bread), or indirectly (as A Person Who Helped Invent Emmer Bread), or ideally some combination of the two.

They are baking away, and honing their baking skills, and scrounging up the money for bigger and better ovens or cleverly-arranging discounted contracts for slightly-larger deliveries of wheat, and more and more bakers see this activity and wander over to their village, to see how this bread is made. Well, the current bakers are starting to sink under all of the bread orders they are receiving, and customers are complaining of late deliveries, so they start to ask the 10 visiting bakers, if they would like to also set up a bakery and take some of the production off of their hands.

We now have 25 bakers

The visiting bakers consider it and 5 agree and the rest wander off again, as they already are quite busy baking the bread they’ve always baked, and they aren’t as certain of the possibility of growth, for this new type of bread.

The 5 additional bakers take a while to setup shop and assemble staff and place wheat orders and etc., but after a few weeks or months, they are also adding to the bread supply. There are now 25 bakers, all completely booked-out, producing bread. The price of bread has fallen, to $8/loaf.

And the bread they produced! All of the bakers competing for orders and expanding their product lines and customer base quickly lead to the white emmer bread being followed by whole-grain emmer bread, emmer dinner rolls, emmer-raisin bread, and even one rebel daring to bake spelt-emmer pretzels because… Well, why not? The customer, (who, at this point, is the person eating the bread), gets to decide which bread will be baked, and the pretzels sell like hotcakes.

The emmer hotcakes also sell like hotcakes.

No baker is making much (or any) money off of the baking, but they all can see where this will end up, so they are still highly motivated and continue to invest and innovate at breathtaking speed. We now have emmer baking mixes, “We luv emmer” t-shirts, emmer baking crowd-sourcing, all-about-emmer recipe books and blogs, etc. The bakers see this all as an investment, and cross-finance their fledgling businesses through selling other bread types, their spouse’s day job, burning through their savings, or working Saturday night, stocking shelves at the grocery.

Everyone can be a winner! Everyone can find their niche-in-niche! Everyone can specialize! Private enterprise for every baker, who rises and falls on his own efforts alone! And although everyone was competing with everyone else, there was no bitterness, as everyone could clearly see that effort and reward were in some sort of balance.

We are now short 3

But, alas, that was not meant to be. The joy and harmony is short-lived.

A gigantic, wealthy foundation, who is dedicated to “ensuring much emmer bread will be baked, by financially supporting emmer bakers” enters the chat.

“We have seen that there is much baking going on, here, but just think how much better and more baking could be done, if we financed your baking! Isn’t that clever? Then you could really concentrate on baking, instead of having to worry about financing your business or marketing your products. All you have to do, is apply to receive our baker’s grant, by signing this form, acknowledging that you will only bake products containing nothing but emmer and you will otherwise support our mission. We promise to pay you $100/loaf.”

The 2 people making spelt-emmer pretzels, and the 1 person making spelt-emmer cookies, refuse to sign on, and slink off, as they are very convinced of the rightness of including spelt. One emmer-purist baker refuses on some economic principle that nobody comprehends, and immediately turns around and goes back to work in their bakery, with their shoulders hunched. But the remaining 21 bakers happily apply for a baker’s grant. The mixed-grain bakers are upset about the breakup of the emmer market, and spend some time sulking, before wandering off to the new, much-smaller, spelt bread market, that is setting up, down the street. Where they sell their bread for $6 and slowly go bankrupt.

And then there were 10

2 weeks go by. 4 weeks go by. Baking has slowed. The grant hopefuls hold a meeting, where they discuss the joys of baking. Baking slows further.

Everyone is too excited, to find out if their new Universal Customer will be paying for the bread they bake. $100 a loaf! Just think of it! All of the bakers quickly do the math and realize that they not only will turn a profit, they can buy themselves a nice house and a new car and…

Nobody listens to the complaints from The Old Customers, who are the useless individual people only paying $8, despite them slaving away, all day, in front of a hot oven. They should be happy that they are getting bread, at all! Instead they complain that the bread is dry, that the delivery is late, that the bottoms are burnt. Ingrates.

And, then, the big day arrives, and the foundation happily announces that they will be giving 10 lucky bakers a grant.

The bakers are stunned. It had seemed that all of the bakers would be getting the grants, not only part of them. But, of course, the Universal Customer looked through the applications and tried to spend its money wisely. Why give grants to 5 bakers, who all produce the same type of olive-emmer bread? Give it to one, and then tell him to produce 5 times as much bread. He is then the olive-emmer bread expert and they will simply keep loose tabs on him, to nudge him to bake the bread in a sensible manner. And, of course, he shall always focus on baking olive bread, as that is what the grant is for.

The bakers stroll off, to their bakeries. Those who baked olive bread and received no grant, close up shop, as they can see which way the wind is blowing. The other grantless bakers reformulate their bakery plans, to see if they can somehow market themselves as “grant-free bakers” and wonder at how long they can stand the humiliation of selling to demanding, fickle customers at \(8/loaf, when others are selling at \)100/loaf, to an indifferent customer who doesn’t even eat it.

The happiest 10 bakers leave for another conference, and while they are gone, their bakeries burn down. Their grants continue to flow, regardless, and the actual bread eaters are now standing in line at the last few bakeries, paying $20/loaf.

The End.